ER Portfolio Allocation - April 2006

Here's my latest asset allocation (click for a larger image)...



Not too different from my March allocation... I did reduce my cash position from 5.1% down to 2.1% by purchasing EFV (Foreign Value Index) and EWU (UK Index). This move also brought by foreign equity position from 2.3% up to 4.9% - close to my policy target.

I am still a bit overweight in Emerging Equity and I'll probably end up selling AUO (an Emerging Equity Prudent Speculator pick) this coming month. I've got a 32% return and I really have no business owning any single emerging equity stock.

I'll be compiling my portfolio performance this weekend and I'm guessing April will be another good month.

Oil Companies & Windfall Taxes

I have a tale of two companies for you today. One is known for it's 'obscene' profits and the other is known for it's hip technology and coolness. I took a look at the latest financials for these companies...

Income Statement	Company 1	Company 2
Pre-Tax Profit Margin	17.8%	14.5%
Income Tax %	41.1%	32%
Post-Tax Profit Margin	10.5%	9.8%

So both companies have net after-tax income of about 10% of sales. Is either company under-taxed? Is either company on 'Corporate Welfare'? Which company should be investigated by congress?

Exxon-Mobile is Company 1 and Apple Computer is Company 2. Still think we should levy a tax on Exxon? What if I told you that CalPERS (the California Public Employee Pension Fund) owned $1.7 billion of Exxon stock?

The Left loves to demonize corporate profits but they often neglect the fact that normal people like you and I are the owners and beneficiaries of those supposedly obscene profits. Furthermore, those companies employ a bunch of people (106,000 for Exxon) with good, high-paying jobs. If you punish profitable companies with extra taxes, all you're really doing is extracting more money from tax-paying citizens so that Congress can build more Bridges To Nowhere.

Morningstar X-Ray

My broker (E*Trade) had a recent promotion that if you deposit $25k into an existing account, you'll receive a free 12 month subscription to Morningstar Premium. For those of you who are unfamiliar with Morningstar, they are best known for their ratings (mostly useless) for mutual funds on a scale of 1 to 5 stars.

One of the best Morningstar features is their Portfolio X-Ray function. You simple download or key-enter all of your stock and mutual fund holdings and their system tells you all sorts of compelling information. Here are some key insights from my portfolio...

• Stock Sector: as compared to the S&P 500, I'm underweight on IT and overweight on Manufacturing
• Stock Type: underweight on Cyclical and Classic Growth while overweighted on High Yield and Hard Asset
• Style: my portfolio is tilted toward mid/small-cap value
• Fund/EFT Expense: I pay a weighted average annual expense 0.76% on my EFT and Mutual Fund holdings
• Unknown Big Holdings: I own significant amounts of Mitsui Fudosan, Land Securities and Mitsubishi Estate. None of these are even listed in the US but Fidelity's International Real Estate Fund (FIREX) owns them all in large quantities.
• Largest Holdings: PVX (2.9%), MO(2.6%) and AEE (2.2%)

Pretty cool.

Hussman Weekly Market Commentary: Hostile Trends

Last week was a very good week to be in the market. Today... well... not so good. My investment with Hussman was the only one of my investments that didn't soar last week but I'm still convinced the guy knows what he's talking about.

Here's this week's installment:

Hussman Funds - Weekly Market Comment: April 24, 2006 - Hostile Trends: "Simply put, the stock market has generally not rewarded risk-taking when interest rates, commodity prices, and consumer confidence have been trending higher. That's not a huge surprise to data monkeys who spend their time analyzing such historical outcomes. Still, my hope is that these simple observables will provide some understanding of why I believe that a fully hedged investment position is appropriate here, despite hopeful consumers, optimistic investors, and even the occasional marginal new high."

Hussman Weekly Commentary: Rich Valuations and Rising Yields are a Dangerous Combination

More well-reasoned doom & gloom from Hussman. I certainly hope he's wrong, but I cannot find a flaw in his reasoning. The best case scenario is that earnings turn out to be very positive for the 1st Quarter and the inevitable correction is delayed.

Hussman Funds - Weekly Market Comment: April 10, 2006 - Rich Valuations and Rising Yields are a Dangerous Combination:

"I won't bother mincing words. Given rich global stock market valuations, slumping quality of internal market action, and rising global interest rates, this is not an appropriate time to accept significant market risk. There is no assurance that stock prices will fall, and no assurance that they might not instead rise further. But from the standpoint of a long-term investor, it's useful to look over the past 7+ years of profitless excitement in the stock market and ask whether tracking every fluctuation in the market - even participating in periodic, marginal new highs - is a necessary objective. In my view, the necessary objective is to accept market risk when the likely return/risk profile is attractive, based on observable measures of valuation and market action, and to avoid, hedge, or diversify away those risks that don't carry attractive return/risk profiles on average."

ER Portfolio Return - March 2006

I had a good month for my investments...

• 2.82% return for March (versus 1.73% for the Russell 3000)
• 2.3% standard deviation - a new 5 year low (2.2% for Russell 3k)
• 6.3% year to date return (5.3% for Russell 3k)

Here's the long view...

ER Portfolio Allocation - March 2006

Here's my latest portfolio allocation...









Not too much to report... except my cash position is a bit too big. I've been considering adding to my commodities position with some gold or silver but the recent & dramatic increases in their prices have spooked me a bit.

My foreign equity position needs some help. I'm not only underweight, but my positions are not very diversified...

• DryShips (DRYS) - A Prudent Speculator pick that yields over 7%... pretty nice and I don't plan on making a change here.
• iShares Singapore Index Fund (EWS) - I bought this before I really committed to my asset allocation. It's done pretty well... it's up 23% in 15 months and it pays a 3.2% yield. No need to sell this one either.

I think I'll buy an overall Developed Equity Index fund... either EFA or EFV. Index Investor thinks that the UK is undervalued... maybe a UK play like EWU would be in order. I'll let you know what I do.

Sold UTEK - 2 Years... 57% Gain

I just sold one of my Prudent stocks today... Ultratech Stepper (UTEK). I bought this about two years ago for $15.70 and I just sold it today for $24.70. The folks at Prudent believe it could go to $35 or $36, but I've had enough... too much volatility. Just look at a two year chart:




A chart like this gives me heartburn and it's not worth the potential upside. I'm taking my annualized return of %25 and running to the nearest value stock or ETF.

Hussman's Weekly Market Commentary - Garbage Stocks

This week Hussman writes about how lower quality stocks have been fueling the market in the past months and that we're near a market top.

Hussman Funds - Weekly Market Comment: April 3, 2006 - Garbage Stocks:

"As of last week, the Market Climate for stocks remained characterized by unusually unfavorable valuations and relatively neutral market action. At present, risk-free interest rates near 5% represent a substantial hurdle for stocks to compete with over the coming, say, 5 year horizon. Even assuming continued earnings growth along the peak 6% trend for the S&P 500, a price/peak-earnings multiple of just under 16 at the end of that 5-year horizon would be sufficient to hold the total return on the S&P 500 below 5%. It would be dangerous to assume that rates need to rise much further to draw demand away from stocks."